Senate NDAA Would Impose Sweeping New Restrictions on Stock Buybacks and Dividends by Defense Contractors

A provision tucked into the Senate’s FY2027 defense authorization bill could reshape how every publicly traded, private equity-backed, and pass-through defense contractor thinks about returning capital to investors. The Senate Armed Services Committee (“SASC”) recently reported its version of the National Defense Authorization Act for Fiscal Year 2027 (S. 4784) (the “Senate NDAA”), which includes Section 815, “Limitations Relating to Capital Distributions for Defense Contractors.” If enacted, beginning June 15, 2027, Section 815 would prohibit the Secretary of Defense from entering into any contract for the procurement of goods or services unless the contractor first agrees in writing not to repurchase its own equity securities, or those of any parent entity, listed on a national securities exchange and not to pay dividends or make other capital distributions with respect to its equity securities, subject to a waiver process tied to an approved “qualifying defense investment” plan.

Section 815, as reported, would represent one of the most significant congressional interventions in defense contractors’ capital-allocation decisions in decades. Because the provision contains no dollar threshold and is not limited to underperforming programs or major weapon systems, it would, on its face, condition every Department of War (“DoW”) contract on a categorical restriction of buybacks and dividends—a condition that reaches beyond the contract itself to corporate decisions traditionally reserved to boards of directors. The restriction also cuts against the Administration’s own agenda of drawing nontraditional vendors and private capital to the defense industrial base, raising questions about the attractiveness of the defense market for the publicly traded contractors, private equity-backed businesses, employee stock ownership plans (“ESOPs”), and pass-through entities that distribute earnings to owners and would be subject to this ban.

Background

On January 7, 2026, the President issued Executive Order 14372, “Prioritizing the Warfighter in Defense Contracting” (the “EO”), accompanied by a White House fact sheet. The EO declares that “defense contractors will no longer conduct stock buy-backs or issue dividends at the expense of accelerated procurement and increased production capacity” and charges the Secretary of War to identify companies engaging in stock buyback while underperforming on their government contracts (Sec. 2-4) .

Section 815 tracks standalone legislation—the Prioritizing the Warfighter in Defense Contracting Act—sponsored by Senators Elizabeth Warren, Josh Hawley, and Mike Lee, and reflects a broader bipartisan skepticism of contractor capital distributions. It also arrives amid a wave of executive actions reshaping defense contracting, including the administration’s recent directive making fixed-price contracts the government’s default, a trend we surveyed in What US Federal Contractors Can Expect in 2026 and Beyond.

The Senate provision is more expansive than the EO. Where the EO is performance-based—restricting distributions only by underperforming contractors on critical programs, and only during the period of underperformance—Section 815 is categorical: it would restrict buybacks and dividends by every DoW contractor, regardless of performance, program criticality, or contract value, with relief available only through the qualifying-defense-investment waiver. It would also carry the force of statute rather than executive policy.

The annual NDAA has long served as a vehicle for consequential procurement-policy changes.

Which Contractors Are Covered?

Section 815 applies to any entity entering into a contract with the DoW for the procurement of goods or services on or after June 15, 2027. The provision contains no dollar threshold, no exemption for commercial-item or small-business contractors, and no limitation on particular programs or contract types. Any company that sells to the DoW would be required to provide the written agreement as a condition of award.

Section 815 operates at the prime-contract level: the restriction attaches to the entity contracting with the Secretary of Defense, and the provision contains no subcontract flow-down requirement. Subcontractors accordingly would not appear to be directly captured in that capacity, although any subcontractor that separately holds its own DoW prime contracts would be covered through those awards. If enacted, contractors should nonetheless watch for implementing regulations, which could address flow-down and other open questions.

Does Section 815 Reach Affiliates?

The provision reaches upstream in a significant way. The buyback restriction bars the contracting entity from purchasing any equity security—as defined in Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. § 78c(a))—of the entity itself or of any parent entity listed on a national securities exchange. A defense subsidiary of a publicly traded parent therefore could not participate in the parent’s repurchase program . The dividend restriction, by contrast, applies to dividends and other capital distributions with respect to the contracting entity’s own equity securities. Corporate groups will need to map which entities hold DoW contracts and how intercompany distributions and parent-level repurchase programs would be affected.

What Restrictions Would Section 815 Impose?

For contracts entered into on or after June 15, 2027, the covered entity must agree in writing that it will not:

• Purchase an equity security of the entity, or of any parent entity, that is listed on a national securities exchange (i.e., conduct stock buybacks); or
• Pay dividends or make other capital distributions with respect to the entity’s equity securities.

The prohibition is subject to a waiver: the Secretary of Defense may permit distributions where the contractor has an approved plan for “qualifying defense investments,” meaning capital expenditures that expand production capacity, purchases of machine tools, applied non-reimbursable research and development directly supporting defense programs, workforce training, and stockpiling of critical materials—expressly excluding costs that are otherwise allowable and reimbursable under the contract. The provision also establishes a compliance architecture: within 30 days of enactment, the Secretary must establish a formal review mechanism that identifies contractors in violation on a continuing basis; a notice of violation; and an option for the contractor to submit a board-approved remediation plan within 15 days of receiving that notice. Available penalties include suspension of payments, revocation of a waiver in whole or as to a business segment, a determination of non-responsibility, termination of progress payments under 10 U.S.C. § 3804, and referral for other administrative action. Section 815 requires annual reporting to Congress and sunsets on January 1, 2031.

For public companies, these restrictions would layer onto an already complex framework governing repurchase programs—including the one percent excise tax on buybacks, which Mayer Brown analyzed in a prior Legal Update on the proposed buyback-tax regulations, and the securities-law considerations addressed in our Top 10 Practice Tips on stock repurchase programs.

Industry Opposition

The provision has drawn substantial industry opposition. On July 14, 2026, a coalition of more than 40 trade associations—including the U.S. Chamber of Commerce, the Aerospace Industries Association, the Business Roundtable, the National Association of Manufacturers, SIFMA, and the Professional Services Council—sent a letter to Senate leadership and the leaders of the Armed Services Committee urging that Section 815 be struck. The coalition argues, among other points, that the provision’s lack of any dollar threshold sweeps in companies with de minimis defense business, that it would harm pass-through entities and ESOPs that rely on distributions, and that it sets a troubling precedent for federal intrusion into corporate governance.

Takeaways

Section 815 currently appears only in the Senate version of the FY2027 NDAA; the House-passed bill does not contain a counterpart, and efforts to add one on the House floor were unsuccessful. The provision’s fate will therefore be decided in conference, where the breadth of the Senate language—and the intensity of industry opposition—will be central points of negotiation. It is very possible the provision emerges narrowed (for example, with dollar thresholds or program limitations) rather than eliminated.

In the meantime, contractors and their investors should assess their exposure now: map which group entities hold or expect DoW contracts; evaluate how a categorical restriction would interact with existing repurchase authorizations, dividend policies, and credit agreements; consider whether planned capital expenditures could support a qualifying-defense-investment waiver; and engage, directly or through trade associations, as conference negotiations proceed. Mayer Brown will continue to monitor the FY2027 NDAA and related executive actions affecting defense contractors.